Exercise 4A-2 (30 minutes)
1. The overhead applied to Ms. Miyami’s account would be computed as
follows:
2010
2011
Estimated overhead cost (a) ………………………..
$144,000
$144,000
Estimated professional staff hours (b) ……………
2,400
2,250
Predetermined overhead rate (a) ÷ (b) …………..
$60
$64
Professional staff hours charged to
Ms. Miyami’s account ……………………………….
× 5
× 5
Overhead applied to Ms. Miyami’s account ………
$300
$320
2. If the actual overhead cost and the actual professional hours charged
turn out to be exactly as estimated there would be no underapplied or
overapplied overhead.
2010
2011
Predetermined overhead rate (see above) ………
$60
$64
Actual professional staff hours charged to
clients’ accounts (by assumption) ……………….
× 2,400
× 2,250
Overhead applied ………………………………………
$144,000
$144,000
Actual overhead cost incurred (by assumption) ..
144,000
144,000
Under- or overapplied overhead ……………………
$ 0
$ 0
3. If the predetermined overhead rate is based on the professional staff
hours available, the computations would be:
2010
2011
Estimated overhead cost (a) ………………………….
$144,000
$144,000
Professional staff hours available (b) ..……………..
3,000
3,000
Predetermined overhead rate (a) ÷ (b) …………...
$48
$48
Professional staff hours charged to Ms. Miyami’s
account ………………………………………………….
× 5
× 5
Overhead applied to Ms. Miyami’s account ……….
$240
$240
Problem 4A-3 (continued)
3. When the predetermined overhead rate is based on capacity,
underapplied overhead is interpreted as the cost of idle capacity.
Indeed, proponents of this method suggest that underapplied overhead
be treated as a period expense that would be separately disclosed on
Under the conventional approach in which the predetermined overhead
rate is based on the estimated studio hours, the apparent cost of the
Slug Fest job has increased between 2010 and 2011. That happens
because the company is losing business to competitors and therefore
the company’s fixed overhead costs are being spread over a smaller
Under the alternative approach, the overhead cost of the Slug Fest job
is stable at $1,500 and lower than the costs reported under the
conventional method. Under the conventional method, managers may
be misled into thinking that they are actually losing money on the Slug
Fest job and they might refuse such jobs in the future—another sure
conclusion that the real problem is the loss of business (and therefore
more idle capacity) rather than an increase in costs.
